Patrick Thöni forsvarer sin ph.d.-afhandling

Patrick Thöni forsvarer sin ph.d.-afhandling: "Essays on Financial Transaction Taxes. Impact on Trading Volume, Market Composition and Liquidity."

Ph.d.-forsvaret foregår i CSS 26.2.21.  Deltagelse pr. Zoom: https://ucph-ku.zoom.us/j/9536476672, passcode: 1234

En elektronisk kopi af afhandlingen kan fås ved henvendelse til: charlotte.jespersen@econ.ku.dk

Bedømmelsesudvalg

Lektor Nick Vikander, Økonomisk Institut, Københavns Universitet, Danmark (formand)
Professor Antonio Guarino, University College London
Lektor Jean-Edouard Colliard, HEC, Paris

Abstract

Financial Markets have undoubtedly played a crucial role in the economic development and technological growth the world has experienced over the last century. The availability of liquid markets greatly facilitates the opportunities of raising capital and risk
sharing, allowing the financing of large-scale real enterprises. Additionally, it enables savers to increase their returns while diversifying their risk. On the other hand, liquid markets also allow for speculative trading, which ultimately can lead to a misallocation of resources. This fundamental trade-off is what lies at the core of the original idea of a financial transaction tax (FTT). While proponents of FTTs highlight their potential to curb speculation driven by short term incentives, opponents argue that it would harm market quality by decreasing overall liquidity, interfering with price discovery and raising the cost of capital. This thesis furthers the existing body of work on this key tension surrounding FTTs from a financial microstructure perspective. By means of both theoretical and empirical analysis, the three self-contained chapters presented in this dissertation investigate the impact of FTTs on trading volume and migration, trader composition and ultimately market quality.

In the first chapter, "On the Non-Homogeneous Effect of Financial Transaction Taxes", I investigate the introduction of a linear tax in the classic setting presented in Kyle (1985, "Continuous Auctions and Insider Trading." Econometrica 53: 1315–1335). Analysis of the benchmark model confirm negative effects of taxation on market liquidity found by most of the previous literature. Importantly, I also find that taxation, through the creation of a no-trade zone, forces the market maker to
price the asset non-linearly with respect to traded quantities. This non-linearity, in turn, leads to heterogeneity’s in the impact of the FTT across different trading sizes. While for large trades taxation only leads to increased spreads and prices, small trades
also experience a decrease in market depth and trading aggressiveness compared to a market without taxation.

The second chapter, "Financial Transaction Taxes and Trading Migration", somewhat departs from the approach and issues generally discussed in the existing theoretical literature. This paper aims at characterizing trading migration induced
by taxation, and its effects on trader composition and market quality. I investigate the introduction of taxation in a multi-market setting, where traders are allowed to trade in stocks and the respective option markets. Equilibrium analysis in this setting
provides the following intuitions. First, taxation of equity and derivatives, conditional on the same tax rate and function being applied to both markets, will lead to asymmetric effects due to the leveraged nature of derivatives. Second, taxation can result
in positive effects on liquidity if trading migration is allowed. This result arises due to an alleviation of the adverse selection problem, caused by migration of informed traders to the untaxed market. If effects of taxation on market makers are taken into
consideration, the impact on liquidity becomes ambiguous. Specifically, increased cost of providing liquidity due to taxation will lead to negative effects on liquidity due to less competition among market makers. Therefore, the combined effect of taxation in
this setting depends on the relative magnitude of these two forces.

Finally, in the third and last chapter, "Multi-Market Effects of Financial Transaction Taxes: Evidence from Italy, France and Spain" (coauthored with Vincent Wolff), we empirically explore some of the predictions made in the previous chapters. We leverage quasi-random experiments in France, Italy and Spain to investigate the introduction of FTTs across equity, derivative and OTC markets. We find striking differences in the effect of taxation on volume and liquidity across countries, which
can largely be attributed to differences in tax design. Italy experienced trading migration across regulated and OTC equity markets as well as significant negative effects on aggregate liquidity. We rationalize the latter through increased informed trading migrated from OTC markets as well as increased costs of providing liquidity due to the specific tax design implemented in Italy. In France and Spain we do not find evidence of trading migration across regulated and non-regulated equity markets. In turn, regulated equity markets experienced significant drops in trading volume, accompanied by very mild effects on aggregate liquidity. Additionally, we do not find evidence of trading migration across equity and regulated derivative market. We therefore reject the idea that payoffs of taxed assets are replicated through standardized derivative products.